Advice from the Field: Create a cash flow spreadsheet

Monday

Nov 5, 2012 at 2:00 AM

Why do I mention cash flow spreadsheets so often?

Charlene Maurer Finerty

Why do I mention cash flow spreadsheets so often?

If you have never created one, you won't understand. If you have built one or more and really leaned on it for guidance, you get it. If you ever compared actual numbers to forecasts, then you really get it.

I write about it, discuss it at one-on-one sessions, and refer to it and explain it in every presentation. I tell my clients the cash flow forecast for the approaching year is the most important page in a business plan. If you refuse to write an entire business plan, for goodness sake, at least prepare a cash flow. Why? Because it is better than saying, "It's in my head." Better than a crystal ball. It is the closest thing to reality — until we get to reality.

A cash flow forecast predicts anticipated bank deposits and expenses by line item, by month, for a future year. A historical cash flow recap shows actual figures for a previous period.

Unlike other business metrics, cash flow tells you how much money is actually coming in and going out the door.

By comparison, the popular profit-and-loss statement and balance sheet sometimes paint a legally manipulated, distorted picture because of varied choices of inventory pricing methods and depreciation concepts. How many small business owners carrying inventory and equipment on the books understand these? Not many.

Is it vital for business owners to know the math intricacies as well as their tax accountant? No. But if your small business owns or will own equipment or inventory, get a basic grasp on the language you expect to hear.

An accountant may mention ACRS, MACRS, double declining, sum of digits, straight line and units of production. All are types of depreciation. You may also hear LIFO, FIFO, weighted average or specific identification, all in regards to inventory.

Merely knowing these phrases exist provides a tiny edge. Having read an explanation of each before meeting with the accountant puts you one step higher on the understanding and retention ladder. The methods of depreciation and inventory pricing you choose will affect profits, which in turn affect taxes, which affect money in an entrepreneur's pocket.

The best accountants will review the business income tax form with you. On a good day with all stars aligned, many of us actually hang onto the conversation. But with the normal pace of life, most of us will not study the forms later that day, and those unfamiliar terms will start to fade.

Don't fall off the chair if your tax preparer says, "And by the way, depreciation on your financials does not match the tax return, because we use different methods on each."

That brings us back to cash flow. Ideally, a cash flow forecast is an accurate prediction of the future checkbook. It's about real money.

-- Charlene Maurer Finerty, owner of Plans and Profits, LLC, edits, teaches and writes custom business plans. See PlansAndProfits.com. She also offers a Write-Your-Own-Business Plan class on DVD at BusinessPlanWritingClass.com. Contact her at finerty@aol.com any time or 343-1515 from 9 a.m.—7 p.m. Her column appears alternating Mondays.